The Schwartz Report

Bidding War Leaves Dell's Future in Limbo

Dell's bid to go private is very much up in the air, and with it is the future of the company and who will run it. When founder and CEO Michael Dell lined up Silver Lake Partners and an ensemble of other investors, including Microsoft, early last month, it appeared reasonably certain the $24.3 billion deal would sail through.

However a week after Michael Dell and Silver Lake made the offer, some key shareholders felt it was a lowball bid and indicated they'd vote against it, hoping for a better offer. As the 45-day "go-shop" period to consider superior offers arrived Friday, the company received two bids.

One was from the private equity fund manager Blackstone Group and the other was from activist investor Carl Icahn, who said he has amassed a 4.6 percent stake in Dell. Under both bids, a portion of the company would remain public.

Icahn wants to buy 58 percent of the company at $15 per share (compared to the existing $13.65 per share offer). Under that scenario, investors could only sell part of their holdings, according to Icahn's proposal, published by Dell this morning. Subsequently, Icahn would hold a 24.1 percent share, Southeastern Asset Management would wind up with a 16.6 percent share, and T. Rowe Price would receive a 9.3 percent share.

Blackstone's offer of $14.25 per share would give shareholders the option of receiving cash or stock, according to the company's proposal. Alex Mandl, chairman of the Special Committee of Dell's board evaluating the bids, issued a statement saying the board will review both bids. "There can be no assurance that either proposal will ultimately lead to a superior proposal," Mandl warned. "While negotiations continue, the Special Committee has not changed its recommendation with respect to, and continues to support, the company's pending sale to entities controlled by Michael Dell and Silver Lake Partners."

If either rival bid is successful, it remains to be seen whether Michael Dell would continue to run the company he built 29 years ago, The Wall Street Journalreported today (subscription required). There were rumblings last week that Blackstone approached former Hewlett-Packard CEO and current Oracle President Mark Hurd about taking the helm of Dell, should Michael Dell not stay on.

Blackstone has more than a passing interest in this deal. The company hired Dell exec David Johnson, a key player in the computer giant's acquisition efforts and now "actively involved" in Blackstone's attempt to acquire Dell, sources told WSJ.

While Blackstone has retained Morgan Stanley to help it secure financing of the deal, several reports say GE Capital is a leading contender to acquire Dell's financing arm for $5 billion.

Silver Lake and Dell have insisted they believe their offer fairly values the company and hence don't plan to counter with a higher bid. An increased offer would add to the already high level of debt the investors would be taking on to go private, thereby extending the risk they're taking on.

The bigger problem for Dell, however, is customer confidence, warned analyst Roger Kay in a Forbesblog post published today, noting with irony that HP by comparison is suddenly looking more stable than Dell. "During HP's rocky time of management changes and policy reversals, Dell and IBM made as much hay as they could," he said. "Now, HP is looking stable-ish and its customers have begun to calm down."

It's too early to tell whether the committee will accept either offer and, if they do, whether the Dell-Silver Lake team will up the ante. Or if the committee rejects both offers favoring the original one, investors could still nix the deal if they can gather enough votes -- an unusually distinct possibility.

And even though Barron's (subscription required) noted today that HP's situation is much improved and its shares are up 62 percent from its 10-year low in November, the report noted HP's revenues are still declining.

As Dell customers, how would you like to see this play out? And is the current uncertainty leading you to shop elsewhere? Drop me a line at jschwartz@1105media.com.